Piercing the Corporate Veil in Florida

Piercing the corporate veil is a legal doctrine that allows a court to disregard the limited liability shield of a corporation or LLC and hold the owners personally liable for the entity’s debts. It is one of the most frequently litigated issues in Florida business law, and for business owners who rely on entity structures for asset protection, understanding how and when courts will pierce the veil is essential.

The limited liability shield is the core reason most business owners form a corporation or LLC. The entity is treated as a separate legal person, and its debts and obligations belong to the entity rather than to the individual owners. When a creditor obtains a judgment against the business, the creditor can pursue the business’s assets but cannot reach the personal assets of the shareholders or members. Piercing the corporate veil eliminates that separation and makes the owners personally responsible.

Florida courts are generally reluctant to pierce the corporate veil. The doctrine is considered an extraordinary remedy that applies only when the entity has been used improperly. But when the facts support it, the consequences are severe. The owner’s personal assets, including bank accounts, real estate, and investments, become available to satisfy what was originally a business debt.

Florida’s Three-Part Test

The Florida Supreme Court established the standard for piercing the corporate veil in Dania Jai-Alai Palace, Inc. v. Sykes. Under this test, a creditor must prove three elements.

The first element requires the creditor to show that the entity is a mere instrumentality or alter ego of the defendant. The entity must have been dominated and controlled by the owner to such an extent that its independent existence was effectively nonexistent. Courts examine whether the entity maintained its own financial records, held its own bank accounts, and operated as a genuinely separate business rather than an extension of the owner’s personal affairs.

The second element requires a showing of improper conduct or fraudulent purpose. Even if the entity is completely dominated by its owner, the veil cannot be pierced unless the entity was also formed or used for an improper purpose. Improper purpose includes forming the entity to defraud creditors, evade existing obligations, mislead third parties, or accomplish some other illegitimate objective. The improper purpose element is the most heavily litigated aspect of the test, and Florida’s appellate courts have consistently held that the corporate veil should not be pierced absent a showing of fraud or similar misconduct.

The third element is causation. The creditor must demonstrate that the owner’s improper use of the entity caused the creditor’s damages. Piercing is not warranted when the damages resulted from ordinary business failure rather than from the owner’s misuse of the entity form. A company that cannot pay its debts because the business failed does not automatically give rise to a piercing claim. The creditor must show a connection between the owner’s conduct and the harm suffered.

Factors Courts Examine

Florida courts evaluate a range of circumstances when determining whether an entity is a mere alter ego of its owner. No single factor is dispositive, and courts typically look at the totality of the evidence.

Commingling of funds is one of the most common grounds for piercing. When an owner uses the entity’s bank account for personal expenses or deposits personal income into the business account without documentation, the separation between the entity and the individual breaks down. Courts view this as evidence that the entity is not being treated as a separate legal person.

Inadequate capitalization at formation is another factor. An entity that is created with no meaningful assets and no realistic ability to meet its anticipated obligations may be viewed as a shell designed to insulate the owner from liability rather than to conduct legitimate business. Courts do not require a specific dollar amount, but the capitalization should be reasonable in light of the entity’s business activities and potential liabilities.

Failure to observe entity formalities also weighs against the owner. For corporations, this includes failing to hold board meetings, failing to maintain minutes, and failing to document major corporate decisions. LLCs have fewer formal requirements under Florida law, but courts still expect to see a written operating agreement, separate financial records, and evidence that the entity was operated as a distinct business.

Other factors include using entity assets for personal purposes, failing to maintain adequate insurance, diverting entity funds to the owner or to other entities controlled by the owner, and representing to third parties that the owner is personally responsible for the entity’s obligations.

Piercing an LLC vs. a Corporation

The veil-piercing analysis applies to both corporations and LLCs, but there are practical differences.

Florida Statute § 605.0503(7)(c) expressly provides that a member of an LLC may be subject to alter ego liability on application to a court by a judgment creditor. This statutory basis for LLC veil-piercing codifies what was already available under common law and confirms that the same general principles apply.

In practice, single-member LLCs face greater piercing risk than multi-member entities. When one person owns and controls the entire entity, the line between the individual and the business is inherently thinner. Courts scrutinize single-member LLCs more carefully for evidence that the entity is merely an alter ego. The operating agreement, separate banking, and documented business transactions become even more important when there is only one owner.

Multi-member LLCs have an inherent structural advantage. The presence of multiple owners with defined rights and obligations makes it more difficult for a creditor to argue that the entity lacks independent existence. The operating agreement governs the relationship among the members and provides written evidence of the entity’s separate governance structure.

It is important to distinguish veil-piercing from charging order analysis. A creditor who holds a judgment against an individual LLC member (as opposed to the LLC itself) typically pursues a charging order rather than a veil-piercing claim. Piercing attacks the entity’s liability shield from the outside in, holding the owner liable for the entity’s debts. Charging orders work from the inside out, allowing a creditor to reach the owner’s distributions from the entity. The two doctrines address different problems and involve different legal standards.

Reverse Piercing

Reverse piercing is the mirror image of traditional veil-piercing. Instead of holding an owner personally liable for the entity’s debts, reverse piercing holds the entity liable for the owner’s personal debts.

A creditor with a judgment against an individual may seek to reach assets held inside a corporation or LLC controlled by that individual. The theory is that if the entity and the owner are truly indistinguishable, then the entity’s assets should be available to satisfy the owner’s personal obligations, just as the owner’s assets would be available for the entity’s debts under traditional piercing.

Florida courts have recognized reverse piercing as an available remedy. In Braswell v. Ryan Investments, the court permitted a creditor to reach corporate assets where the individual owner had transferred personal assets into the entity to evade collection. The doctrine functions similarly to a fraudulent transfer claim but operates through the alter ego framework rather than through the transfer avoidance statutes.

Reverse piercing is most likely to succeed when the owner formed or funded the entity specifically to shelter personal assets from an existing or anticipated creditor. It is less likely to succeed when the entity has been operating as a legitimate business with assets acquired through its own business activities.

Parent-Subsidiary Piercing

Piercing the corporate veil is not limited to claims against individual owners. A creditor of a subsidiary entity may seek to hold the parent entity liable by arguing that the subsidiary is a mere instrumentality of the parent.

The same three-part test applies. The creditor must show that the parent dominated the subsidiary to such a degree that the subsidiary had no independent existence, that the parent used the subsidiary for an improper purpose, and that the improper conduct caused damages. Florida courts have applied this analysis in cases involving parent corporations that created undercapitalized subsidiaries to conduct high-risk activities while insulating the parent’s assets.

For business owners who use multiple LLCs to separate liability assets from safe assets, proper structuring is critical. Each entity must maintain its own bank accounts, its own financial records, and its own operating agreement. The entities should transact with each other at arm’s length, with documented agreements for any services, leases, or licenses between them. Cross-entity commingling of funds or management is the fastest path to a successful piercing claim against the parent or related entities.

Preventing Veil-Piercing Claims

The most effective defense against piercing is prevention through proper entity maintenance. Florida courts consistently protect business owners who respect the separateness of their entities.

Maintaining a written operating agreement is the foundation. For LLCs, the operating agreement documents the entity’s governance structure, financial arrangements, and operational procedures. It is the primary evidence that the entity has an existence independent of its owner. Courts are far less likely to pierce the veil of an entity that has a detailed, current operating agreement that the members actually follow.

Separate banking is equally important. The entity should have its own bank account, and all business income and expenses should flow through that account. Personal expenses should never be paid from the business account. If the owner needs to borrow money from the entity or contribute personal funds, the transaction should be documented as a loan with written terms.

Adequate capitalization at formation and on an ongoing basis protects against the argument that the entity is a shell. The entity should have sufficient resources to meet its reasonably anticipated obligations, including insurance coverage appropriate for its activities.

Documentation of major decisions provides evidence of independent governance. While LLCs are not required to hold formal meetings like corporations, documenting significant decisions through written resolutions or meeting notes demonstrates that the entity operates through its own governance process rather than at the owner’s personal direction.

Keeping entity assets and personal assets strictly separate eliminates the most common basis for alter ego claims. This includes not only bank accounts but also real estate titles, vehicle registrations, insurance policies, and contracts. Every asset should be clearly owned by either the entity or the individual, and the ownership should be reflected in all relevant records.